A “mild pickup” may be in store for the U.S. economy this spring following a post-holiday lull, the Conference Board said Thursday as it reported that its leading economic index rose 0.5% in October.

Economists polled by MarketWatch had expected the index, a weighted gauge of 10 indicators that are designed to signal business cycle peaks and troughs, to gain 0.6%. October’s result was supported by gains in the financial components.

Six of the 10 indicators rose in October, with the largest contribution from the interest rate spread. Among the two negative contributors, the largest negative contribution came from the index of supplier deliveries. Two of the indicators held steady in October.

Wednesday, November 17, 2010

Over the last twelve months, core CPI climbed 0.6 per cent, or “the smallest 12-month increase in the history of the index, which dates to 1957,” according to the BLS. There’s been a slight divergence between the core and headline numbers in recent months, with the majority of it accounted for by higher gas prices — but even then, the headline figure only climbed 1.2 per cent.

On September 21st, the FOMC signalled a new round of quantitative easing with the following:

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

An interesting theory from James Bianco (via The Big Picture) as to why we perhaps shouldn't be surprised that the positive impact of QEII has been outside the Treasury bond market (even though they are targeting $600-$900 billion in Treasury purchases).

Over the last several weeks we have repeatedly mentioned the Federal Reserve’s portfolio balance theory. In a nutshell, this theory states it does not matter what securities the Federal Reserve buys with newly printed money (QE2). The market will arbitrage this new money into the market that it thinks will have the most impact.

With that theory in mind, lets take a look at one relationship that seems to have diverged since the announcment of QEII... the rather strong relationship (outlined here) between gold and Treasuries.

New home construction fell to an 18-month low in October, the government said Wednesday. Housing starts, or the number of new homes being built, fell 11.7% to a seasonally adjusted annual rate of 519,000 in October, down from a revised 588,000 in September, the Commerce Department said. The annual rate is the lowest since the 477,000 starts reported for April 2009.

The west's 91,000 annualized figure is the second lowest total in more than 50 years.

U.S. consumer inflation decelerated in October, the Labor Department said Wednesday. The consumer price index increased 0.2% in October, driven by a 2.6% gain in energy prices. Other price increases were moderate, including food. The core CPI, excluding food and energy costs, was flat for the third straight month in October. Economists were expecting the CPI to rise 0.3% in October and for the core rate to rise 0.1%. In the past year, the CPI has risen 1.2%. The core rate is up 0.6%, the slowest pace on record and well below the Fed's target of about a 2% rate.

Monday, November 15, 2010

Business conditions in the New York area deteriorated in November, as the New York Fed's Empire State manufacturing survey plummeted 27 points to -11.1, driven by a sharp drop in new orders. The release was far worse than economist expectations for a +15 reading and marks the first negative reading since July 2009. The shipments index also fell below zero.

Update:

A reader points out that while the current index dropped, the outlook was quite positive.

U.S. retail sales rose for the fourth straight month, climbing 1.2% in October, as consumers flocked to auto showrooms and made more purchases online. Sales for September and August were also revised higher. Excluding motor vehicles, retail sales rose 0.4% in October, the Commerce Department reported Monday. Economists surveyed by MarketWatch had forecast total sales to rise by 0.7%, or 0.4% excluding the volatile automotive segment. Retail sales have risen at an annual rate of 6.3% over the past three months. Sales were revised to a 0.7% increase in September, compared to an original reading of 0.6%. August sales were revised up to 0.9% from 0.7%

Sunday, November 14, 2010

Japan’s economy grew more than forecast in the third quarter as consumer spending increased, shielding the expansion from a stronger yen and export slowdown likely to have a greater impact this quarter.

Gross domestic product rose an annualized 3.9 percent in the three months ended Sept. 30, following a revised 1.8 percent expansion in the previous quarter, the Cabinet Office said in Tokyo today. In nominal terms, the economy grew 2.9 percent.

The article goes on to detail that a lot of the growth was due to a purchases of fuel-efficient cars ahead of an expiration of a subsidy.

Longer term we see the remarkable fact that Japanese GDP in nominal terms is right where it was in Q3 1993 (yes 17 years ago), while real GDP is just 18% higher over that same time frame (less than 1% annualized growth).

The European Union grew by 0.4% over the 3rd quarter, declining from the 1.0% growth rate posted last quarter. The GDP figure just missed analysts´expectations of 0.5% forecasted ahead of time. Over the year, GDP over the EU remained unchanged as expected at 1.9%.

Thursday, November 11, 2010

Below is a chart of the 10 year Treasury yield and what the market is pricing in for the 10 year yield, ten years forward (along with the five year average of each).

What we see is that the current yield is well below the five year average (bringing up concerns there is a "bond bubble"), but we can also clearly see that the market is already pricing in the yield to rise to a level that is higher than its five year average in ten years.

If a reversion from these lows is already priced in (past its five year average), I don't see how we are in a bubble (i.e. "bubbles" are not supposed to be priced into the market).

Wednesday, November 10, 2010

When excessive speculation enters a market. Instead of viewing the intrinsic value of an asset, speculators in a bubble market instead focus on the resale value of the asset. This is sometimes referred to as the greater fool theory of investing. In a bubble, it doesn't seem to matter that a price is irrationally high - it only matters that it can be sold for an even more irrational price at a later date. Bubbles often end with steep declines, where most of the speculative gains are quickly wiped out.

Chronicle (hat tip Infectious Greed) details that almost 10% of private undergraduate schools now cost more than $50k / year to attend (bold mine):

The ranks of the most expensive colleges have grown again: 100 institutions are charging $50,000 or more for tuition, fees, room, and board in 2010-11, according to a Chronicle analysis of data released last week by the College Board. That's well above the 58 universities and colleges that charged that much in 2009-10, and a major jump from the year before, when only five colleges were priced over $50,000.

This year marks a milestone as the first public institution has joined that elite club: the University of California at Berkeley is charging out-of-state residents $50,649 for tuition, fees, room, and board. (The price for in-state residents is only $27,770.)

Below is a chart of the top 20 such schools.

My thoughts:

education is not necessarily a traditional "asset", but an undergraduate education definitely has an intrinsic value

the cost of many / most private school undergraduate educations are (insanely) over-inflated relative to their intrinsic value; simply compare the cost to similar, yet more affordable alternatives (i.e. schools that don't cost more per year than GDP per capita)

the perceived benefit of these schools is in many cases focused on the resale value of the education (i.e. the value a corporation may perceive of that brand, which may be re-sold in the form of higher compensation, rather than what was actually learned)

Based on the above, I am comfortable claiming that private school tuitions are now in a bubble.

Amazing (to me) is that these schools have not only been able to raise the price of tuition / room / board to levels that are ridiculous in both absolute ($50k a year x 4 = $200k!!!) and relative (the national average is a still unreal $21k / year) terms, but they have done it in the years directly following the worst economic downturn since the Great Depression.

Monday, November 8, 2010

The NY Fed (hat tip Calculated Risk) details that the decline in consumer credit outstanding is due in large part to consumer retrenchment and not just outright default.

Excluding the effects of defaults and charge-offs, available data show that non-mortgage debt fell for the first time since at least 2000. Also, net mortgage debt paydowns, which began in 2008, reached nearly $140 billion by year end 2009. These unique findings suggest that consumers have been actively reducing their debts, and not just by defaulting.

“Consumer debt is declining but only part of the reduction is attributable to defaults and charge-offs,” said Donghoon Lee, senior economist in the Research and Statistics Group at the New York Fed. “Americans are borrowing less and paying off more debt than in the recent past. This change, which we continue to study carefully, can be a result of both tightening credit standards and voluntary changes in saving behavior.”

While the chart below shows the cumulative pullback in consumer credit outstanding, it is important to note that the total amount (revolving plus non-revolving) flipped positive for September (noise or a bottom?).

I get a fair number of comments to the effect that worries about deflation are all wrong, look at commodity prices. I’ve tried in the past to explain why we should focus on sluggish, sticky prices, not volatile prices like commodities — hence core inflation. But let me add another point: arguably the stickiest, sluggishiest prices are those of labor. So why not focus on wages?

Nonfarm payrolls rose by a greater-than-expected 151,000 last month as private-sector employers added 159,000 jobs, the Labor Department said Friday. The September number was revised to show payrolls fell by 41,000, less than an original estimate of a 95,000 decline.

However, the unemployment rate, which is obtained from a separate household survey, remained at a lofty 9.6% in October. About 14.8 million people who would like to work can't get a job. The jobless rate has been above 9.0% since May 2009, right before the recession ended.

Odd reports... the headline non-farm payroll number jumped more than expected.

But, the household survey disappointed, with the number employed actually falling and those leaving the workforce jumping by more than 400k.

Thursday, November 4, 2010

EconomPic detailed earlier that output per hour and hours worked both turned positive year over year. When this has happened historically, the equity market (as defined by the S&P 500) has done quite well (up 8% 12 months forward on average excluding dividends).

One aspect of quantitative easing that many may have missed is just how much money the Fed is set to make off these programs.

Last March the Fed starting their $1.25 TRILLION program of purchasing Agency MBS. For an entity that can borrow on the cheap (i.e. free) the returns have been spectacular.

The latest program is basically doing what banks have been doing for ages... borrowing short, lending long.

How much can be made?

The Fed's statement provides details of their purchases (here NY Fed). Using the current yield levels to determine an estimate yield of their Treasury purchases, an estimated yield of 1.2% - 1.6% seems likely.

Wednesday, November 3, 2010

Wall Street traders, who typically receive the fattest year-end bonuses among bank employees, are poised to suffer the biggest pay cuts as revenue at their divisions dropped an average of 12 percent so far this year.

Goldman Sachs Group Inc., the New York-based bank that makes most of its money from trading and set a Wall Street pay record in 2007, slashed average compensation 26 percent in the first nine months. By contrast, Charlotte, North Carolina-based Bank of America Corp., which employs branch managers and brokers as well as bankers and traders, raised average pay 10 percent.

The Treasury market delivered a vote of confidence to the Federal Reserve Wednesday as the price of the 30-year bond plummeted, a signal the market believes the Fed's big bond buying will eventually spur inflation.

"The market appears to be pricing in the likelihood that [quantitative easing] will eventually succeed, and is positioning itself ahead of the inflation that may materialize in years ahead as a result of a successful reflation program," said Kevin Giddis, president of fixed income capital markets at Morgan Keegan + Co. in Memphis.

Tuesday, November 2, 2010

The Federal Reserve will probably begin a new round of unconventional monetary easing this week by announcing a plan to buy at least $500 billion of long-term securities, according to economists surveyed by Bloomberg News.

New York Fed President William Dudley set expectations for $500 billion in purchases when he said in an Oct. 1 speech that purchases totaling about that amount would add as much stimulus as lowering the Fed’s benchmark rate by 0.5 percentage point to 0.75 percentage point.

Yields on bonds from junk-rated companies in emerging markets are approaching the lowest relative to investment grade since June 2008 as less creditworthy borrowers benefit most from cash pouring into developing countries.

“People literally cannot buy enough” junk bonds of companies in developing nations, said Steve Gooden, managing director of emerging markets in London at Macquarie Group Ltd., Australia’s biggest investment bank. Investors are buying corporate junk notes from such nations because high-grade supply can’t keep up with demand, he said.

China’s U.S. dollar borrowing costs fell in October by the most since January as investors bet record currency reserves of $2.65 trillion will help the world’s fastest-growing economy win a higher debt rating.

The yield on China’s $1 billion of 4.75 percent notes due October 2013 dropped 31 basis points last month, or 0.31 percentage point, to 1.46 percent, according to Royal Bank of Scotland Group Plc prices. The extra yield over similar-maturity U.S. Treasuries narrowed 15 basis points to a three-month low of 95.

The savings rate for U.S. households fell to its lowest level in more than a year in September as incomes fell and spending increased, the Commerce Department said Monday. Personal income fell 0.1% in September. This is the largest decline since July 2009. Consumer spending rose 0.2%. Wall Street economists had expected a 0.2% increase in income and a 0.3% gain in spending.

Real disposable incomes fell 0.3% in September. Inflation moderated further in September. The personal consumption expenditure price rose 0.1% in September after a 0.2% gain in August. Inflation is up 1.4% in the past year. The core PCE was flat in September after rising 0.1% in August. Economists expected a 0.1% gain.